CR corrections Flashcards
Explain impact on individual statements and consol of the following:
(1) Employment legal proceedings
In 20X5, 10 female BBO employees began a legal case against BBO. The employees claim that they are not receiving equal pay with their male employee colleagues. The female employees believe that they are owed a total of £500,000. If the 10 female employees win, it will also result in additional payments of £1 million to other BBO female employees. The case is ongoing and BBO’s legal team think that it is possible, but not probable, that BBO will lose the case.
If the public became aware of the legal case, BBO would be seriously disadvantaged. The BBO directors have not therefore recognised a provision and have not included a disclosure note for this matter in the financial statements.
IAS 37 states that a provision should be recognised if an entity has a present obligation as a result of a past event which will result in a transfer of economic benefit which will be probable, and a reliable estimate can be made of the amount of the obligation. Therefore, the directors are correct in not including a provision if it is not probable that the company will pay the
£500,000.
IAS 37 also deals with contingencies. It requires that entities should not recognise contingent liabilities – but should disclose them, unless the possibility of an outflow of economic resources is remote (IAS 37.86).
A contingent liability is defined as:
a possible obligation depending on whether some uncertain future event occurs; or
a present obligation but payment is not probable, or the amount cannot be measured reliably.
As no disclosure is proposed, the directors’ judgement on this matter should be challenged by the auditors.
Implications for consolidation schedule
Contingent liabs are inc in calc of FV of assets acquired!-
If the matter is disclosed as a contingent liability this will have an impact on the consolidation schedule as contingent liabilities are measured in the calculation of the fair value of the assets acquired. Further information is required to determine whether the amounts should be disclosed and whether the amounts should be adjusted in the calculation of goodwill.
Explain impact on individual statements and consol of the following:
BBO developed a biodegradable plastic which it uses to manufacture bottles for its products. In 20X5, tests performed by BBO showed that the plastic would degrade within five years. At 1 April 20X6, the carrying amount of the plastic process development costs was £3.2 million in BBO’s statement of financial position and the fair value was £10 million at that date.
A recent newspaper article quotes a BBO research technician who says that the tests performed in 20X5 were inaccurate and the plastic will take over 50 years to degrade. Since the article was published, pictures of BBO’s empty bottles washed up on beaches have been posted on social media by outraged environmental protesters. YN now believes that it has paid too much for its investment in BBO, as the fair value of the plastic process development costs is now £4 million following the adverse publicity.
The development costs are recognised by BBO correctly at cost and the carrying amount at 1 April 20X6 was £3.2 million.
The carrying amount at 31.12.20X6 is now £3 million (in SOFP statement) – which suggests amortisation of just £200,000 in nine months.
The news report represents an impairment indicator that the fair value has fallen.
In BBO’s individual financial statements, comparing the carrying amount with the fair value it is still lower than the estimated fair value of £4 million.
It may be that the useful life should be reappraised given the bad publicity and the claims made by the BBO research technician.
Implications for the consolidation schedule
On consolidation, the development costs should be adjusted to fair value. As the consolidation has been completed incorrectly, and no adjustment has been made on the draft in Exhibit 1 for the fair value of the development costs, these should now be measured at £4 million at 1 April 20X6. Hence there is an impact on the calculation of goodwill at acquisition.
There should also be a subsequent adjustment to amortisation and an estimate of useful life would be required for this adjustment.
Explain impact on individual statements and consol of the following:
BBO’s Norfolk division has failed to meet legal requirements in respect of environmental legislation.
On 1 November 20X6, the YN board decided to close the BBO Norfolk division over a three-year period from 1 January 20X7. BBO identifies the Norfolk division as a cash generating unit.
The division has a carrying amount of £7 million.
At 31 December 20X6, the division could be sold for £5.5 million.
BBO uses a 9% pre-tax annual discount rate and this gives value in use of 4144k
An impairment arises as the recoverable amount is lower than the carrying amount. The recoverable amount is £5,500,000 which is the higher of the selling price £5,500,000 and the value in use £4,144,000. The fair value of the assets should be reduced by £1,500,000
As no announcement has been made regarding redundancy costs, no provisions are recognised in the financial statements for the year ending 31 December 20X6.
Implications for the consolidation schedule
This would be post-acquisition as no irreversible decision was made at the point of acquisition – therefore no impact on goodwill
Explain impact on individual statements and consol of the following:
At 1 April 20X6, a plot of land included in BBO’s assets had a carrying amount of £3 million which is equal to its market value based on its current use as an industrial site. Residential development in the
area near to the factory means that, if the land were to be made available for residential purposes, it would have a value of £3.75 million. I am unsure if this increase in value should be recognised. BBO’s accounting policy is to value assets at historical cost
The land is not impaired on best alternative use basis, therefore, no adjustment is needed. As BBO does not have a revaluation policy, no revaluation should be included in its financial statements.
Implication for consolidation schedule
This will affect the goodwill calculation as the assets acquired are adjusted to fair value.
Explain impact on individual statements and consol of the following:
Included in BBO receivables is an account balance of £475,000 called ‘accrued income’. The BBO finance director explained that it relates to goods sold to Beauty Inc and, as he owns 25% of the shares in Beauty and is a director of Beauty, he could personally guarantee that the debt will be repaid. He told me that there was no need to include a trade receivable allowance for this account and, as the amount is not material to the group results, no disclosure is required. I investigated the balance and it relates to goods sold in May 20X6.
Further information is required to determine whether an allowance is required for this receivable.
Disclosure may be required as a related party transaction within IAS 24 if the director is a member of the key management of Beauty Inc and a significant shareholder. If this were sufficient to give effective control then could be deemed to be a related party and the
disclosure requirement should be brought to YN’s attention
Explain impact on individual statements and consol of the following:
BBO has a high staff turnover rate and absenteeism because of work-related stress.
Feedback from employees suggests that these are due to difficult working conditions, high accident rates and excessive expectations of performance by management.
On 1 April 20X6, to improve staff morale, the BBO board introduced a share appreciation rights scheme for all BBO employees, based on the share price of YN. Under the scheme, 500 employees will receive a cash amount based on the increase in the fair value of YN shares between the grant date, 1 April 20X6, and the vesting date, 31 March 20X9. The employees must be in continuous employment to 31 March 20X9.
At 1 April 20X6, there are 500 employees eligible for the scheme, each of whom has appreciation rights over 400 shares. BBO expects 50 employees to be made redundant by 31 March 20X9 because of the closure of BBO’s Norfolk division. The fair value of the appreciation rights was £9 per share at 1 April 20X6 and is expected to be £12 per share at 31 December 20X6. No adjustments have been made for the rights in the financial statements for the year ending 31 December 20X6
IFRS 2, Share-based Payment requires that an expense is recognised in respect of the share appreciation rights in the profit or loss. This is a cash-settled share-based payment.
For the three years to the vesting date, the expense is based on the entity’s estimate of the number of SARs that will vest. However, the fair value of the liability is remeasured at each year
end.
At 31 December 20X6 an expense and liability should be recognised as follows:
Expected to vest = (500 – 50) = 450 × 400 × £12 = £2,160,000 × 9/36 = £540,000 Dr expense SPL Cr liab
Explain the FR treatment:
On 1 May 20X7, Raven had 200,000 £1 ordinary shares in issue.
On 1 November 20X7, Ester Ltd, one of Raven’s suppliers, agreed that each month it would supply goods at a fair value of £2,000 in exchange for 50 new £1 shares in Raven. This agreement is for a period of two years until 31 October 20X9.
As a result, in the year ended 30 April 20X8, 300 £1 ordinary shares were issued to Ester. No accounting entry has yet been made in respect of the share issue, but the following entry has been made in respect of goods purchased from Ester between 1 November 20X7 and 30 April 20X8:
Cr payables Dr COS £12k each
This is a share based payment - goods supplied for share consideration rather than
cash.
Consideration (and therefore share value) is based on the fair value of the goods
received.
Correct to recognise £12,000 in COS but not as a trade payable.
Should show £12,000 in equity as the shares have been issued at the y/e. Total value
of the goods is £12,000 therefore number of shares issued = (12,000 / 2,000) x 50 =
300.
To correct:
Dr Trade payables 12,000
Cr SC 300
Cr SP 11,700
